Intel's Xeon biz bolstered by server refreshes

The PC market may go into a slump this year thanks to booming tablet sales, but as far as Intel can see, the server refresh cycle is accelerating as companies want to get rid of their ancient x64 boxes.

As Intel has said many times, the Great Recession put the upgrade of millions of servers on hold, and in a lot of data centers, there are old single-core and dual-core machines out there taking up space, cranking out heat, and not doing anywhere as much work as a modern multicore system can do.

At the launch of the "Westmere-EX" Xeon E7 processors two weeks ago, Kirk Skaugen, general manager of Intel's Data Center Group, said that the company estimated that about 20 per cent of the installed base of x64 servers out there in the world today had only a single core per processor socket, and that another 50 per cent were only providing two cores per socket.

Intel is shipping Xeon 5600 processors with six cores per socket for two-socket boxes, and now Xeon E7s with 10 cores per socket – on machines with two, four, or eight sockets. So you can now get anywhere from a factor of 18 to 29 reduction in machine count by moving from dual-core or single-core vintage Xeon or Opteron boxes to the current Intel line – all in the same power envelope. This math seems to be sinking in for bean counters as well as IT and data center managers.

In the first quarter, Intel's Data Center Group turned in a solid quarter, with revenues up 32 per cent year-on-year to $2.5bn. That represented only a 2 per cent dip from the fourth quarter, which is historically a strong one for Intel and the rest of the IT industry. To say that there is pent-up demand for servers is a bit of an understatement. The question – and one that no one who is in the server racket wants to answer – is how long can the demand last?

Within the Data Center Group, microprocessor sales were $2.06bn, up 33 per cent, while chipset, motherboard, and other product sales were $403m, rising 26 per cent. Data Center Group posted operating income of $1.22bn, up a very healthy 47 per cent. If you attribute overhead evenly across Intel's several units – and we are not saying Intel does this or should – then the Data Center Group brought somewhere around $606m to Intel's bottom line, which came to $3.16bn for the whole company in Q1.

Speaking to Wall Street analysts after the market closed yesterday (April 19) when Intel announced its financial results, Paul Otellini, Intel's president and CEO, said that the Data Center Group was on a trajectory to have $10bn in sales in 2010, pushing products aimed at servers, storage, and networking platforms.

"The cloud buildout continues to be a major driver of growth for the company," Otellini said in the call, "with demand from China showing notable strength this quarter." He added that demand for the single-socket Xeon E3-1200 processors for entry servers and workstations "has been very strong".

The use of Intel Xeon chips and chipsets in storage products drive up revenues for this subset of the Data Center Group up 65 per cent from the year ago quarter and up 45 per cent sequentially from the fourth quarter. Otellini did not say how much revenue this represented, but clearly Intel is thrilled with that kind of uptake of its Xeon products among storage array makers.

On the cloud front, Otellini said that Intel expected that by 2014, half of the market for Xeon processors would be for high performance computing and clouds. This may sound like a big dramatic shift, especially when Otellini pointed out that only a few years ago, 80 per cent of Xeon business was for what he called "enterprise servers". But perhaps there is more drama than actual change. This kind of loose language is making the cloud phenomenon seem larger than it is.

Why Intel thinks mixing numbers for HPC and virtualized, cloudy servers together makes sense is one issue we have with what Otellini said. But more importantly, this shift is significant, but once it is over it does not mean that Intel ends up selling more Xeon processors going forward. Intel may, in fact, end up selling fewer processors unless there is something akin to perfect elasticity for applications driven from clouds to smartphones, tablets, and PCs.

We are without a doubt in a buildout for cloudy infrastructure, just like we were in a buildout of raw computing capacity for parallelized web applications in the late 1990s and early 2000s. And when that first boom was done, the server market crashed like it has never crashed before. Until the Great Recession, of course.

What seems pretty obvious is that most companies are not going to buy 18X to 29X the number of servers they currently have as they move from vintage machines that are long in the tooth to shiny new boxes. They will get rid of the old kit and leave themselves room to re-expand their data center racks over the next decade in the same power envelopes. That means the server business will show very good growth in 2011 and 2012, as companies ditch that old gear, but after that, we'll just have to see.

While some very large public infrastructure and platform clouds will no doubt be built, every workload running efficiently with neighbors on a shared public cloud is a fraction of a physical server that a company did not buy. Virtualization allows for the interleaving of workloads within a company, yielding efficiencies that justify the virtualization overhead. Clouds will allow interleaving of workloads across companies and time zones and should mean fewer boxes for any given workload. ®